The stock market's rally seemed to stall a bit last week. The big cap S&P 500 index still hit new record highs but for the most part equities churned sideways. The question traders want to answer is if this sideways consolidation is merely a rest that recharges the rally or if it's a top before the market corrects lower?

Crude oil remained in focus as the commodity continued to sink. Oil's drop was a surprise for some who expected oil to hold $80 a barrel. WTI crude oil slipped to $73.50 a barrel on Thursday night before ending the week near $76. Brent crude also closed the week below $80 at $79.60 a barrel. The U.S. dollar spent the week consolidating sideways but the Japanese yen continued to hit new lows.

Meanwhile precious metals spiked late in the week as investors expect central banks to buy more gold and there was a story that Russia was buying huge amounts of gold as it prepares for more economic challenges ahead. Gold closed at $1,191 an ounce and silver ended at $16.33 an ounce on Friday.

The drop in oil helped fuel more gains for the transportation stocks and the Dow Jones Transportation average add +1.26% for the week. The semiconductor stocks were also showing strength with a +1.27% gain in the SOX index. Financials and biotechs underperformed with the banking stocks down -0.5% and biotechs down -0.7%. Many individual biotech names experienced much sharper declines. There has been some suggestion to watch the biotech stocks as a sentiment indicator and the weakness last week could be a warning signal.

Economic Data

Economic data in the U.S. was light but what we did see was generally positive. The NFIB small business optimism index improved from 95.3 in September to 96.1 in October. The labor market continues to slowly improve and new data showed people were quitting their jobs at the highest levels since 2008, which suggest they are finding it easier to get better jobs.

Consumer sentiment continues to improvement and the November reading rose +3 points to 89.4, which is a seven-year high. The current conditions number surged five points to 103.0. Analysts believe that plunging gasoline prices have played a big role in consumer sentiment, which suggest a happier, more active shopper.

We did see improvement in the latest retail sales numbers. The U.S. Commerce Department said the nation's retail sales rose +0.3% in October compared to a -0.3% drop in September. Falling gasoline prices negatively impacted the overall headline number. If you back out the impact of gas and automobile sales on retail sales then October saw +0.6% improvement.

Overseas Economic Data

Economic data overseas remains mixed. We did not get a lot of news out of Asia. Although a falling yen, which makes Japanese exports cheaper, helped push the Japanese NIKKEI to a seven-year high. It did not hurt that we are hearing speculation Japanese Prime Minister Shinzo Abe might delay the next proposed sales tax increase planned in 2015.

There is also speculation that the European Central Bank (ECB) will start buying asset-backed securities as early as this week. Most of the focus on Europe revolved around the latest GDP numbers. As a whole the Eurozone GDP grew at an annualized pace of +0.6%. Quarter over quarter the Eurozone only grew at +0.2%. Smaller, still struggling countries like Greece saw improvement with the Greek economy growing +0.7%. Spain saw improvement as well with +0.5% growth. Yet Italy came in at -0.1%, marking its third negative quarter in a row (Italy is in a recession).

France came in better than expected with +0.7% growth in the third quarter, up from -0.1% in the second quarter and better than the +0.1% estimate. Unfortunately, the Eurozone's biggest economy is Germany and Germany narrowly escaped another recession. Last quarter Germany's economy fell -0.1%. According to last week's report Germany grew +0.1% in the third quarter. That means technically Germany has avoided a recession, which is two quarters in a row of negative growth but we are assuming this number isn't revised lower.

Low growth isn't Europe's only problem. They're still facing the looming threat of deflation. The latest numbers showed Eurozone's annualized inflation at +0.4%, which is significantly below the ECB's target of 2%. Influential analyst Mohamed A. El-Erian warned that Europe is facing a number of challenges and is the world's biggest economic threat. El-Erian pointed out that Europe depends on exports and the current geopolitical tensions with Russia and all the sanctions between Russia and the West have significantly hampered Europe's export growth.

El-Erian acknowledges that the ECB is trying to help but the central bank cannot create "genuine growth creation". He cautioned investors saying, "The world's growth engines aren't powerful enough to pull the caboose of Europe with a quasi-permanent growth deficit. The danger is that, especially with slowing activity in emerging economies, Europe could end up dragging down the most robust countries (particularly the U.S., which the rest of the world is looking to as a global growth locomotive)."

Major Indices:

The S&P 500 eked out +0.5% gain last week. That means the index is up four weeks in a row. It also means the S&P 500 is up +12.0% from its October 15th low of 1820, just 22 trading days ago. This index is very short-term overbought. A pullback would be healthy.

If we do see a pullback the 2,000 mark is a good spot to look for support. A normal 38.2% Fibonacci retracement of the rally from its October low would mean a dip to 1955 but I do not expect the index to decline that much. There are too many investors itching at the chance to jump in and buy stocks on a pullback.

Year to date the S&P 500 is up +10.3%.

chart of the S&P 500 index:

The NASDAQ displayed some relative strength last week +1.2% gain. These are new 14-year highs. The NASDAQ is also short-term overbought with a 572-point bounce from its October 15th low (+13.8%). Yet the NASDAQ doesn't seem to be slowing down. It paused the first week of November but posted gains every day last week.

If the NASDAQ composite can breakout past round-number resistance near 4700 then the next resistance level could be 4750. Alternatively, if stocks see a pullback the 4600 level should be support. Below that I'd look for support near 4500. Year to date the NASDAQ is up +12.3%.

chart of the NASDAQ Composite index:

It was a very different story for the small cap Russell 2000 index. Thursday's decline in the $RUT looks like a bearish reversal. Friday saw further weakness and a breakdown under the $RUT's simple 10-dma. The index hasn't closed below the 10-dma since mid October. The two-day pullback erased the $RUT's gains to just +0.04%. If we do see stocks retreat the 1150 area should be support as the level is underpinned by the simple 200-dma.

Unfortunately, weakness in the Russell could be a bearish sentiment indicator. The small caps tend to outperform the market on the way up and underperform the market on the way down. The $RUT's performance could be another sentiment, early-warning indicator.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week we will see a couple of regional Federal Reserve surveys with New York and Philadelphia reporting. We'll also get a look at inflation on both the wholesale (PPI) and retail level (CPI). The big event could be the FOMC minutes from the last meeting.

Economic and Event Calendar

- Monday, November 17 -
New York Empire State manufacturing survey
U.S. Industrial Production

- Tuesday, November 18 -
Producer Price Index (PPI)
NAHB housing market index

- Wednesday, November 19 -
U.S. Housing starts and building permits
FOMC minutes from the last meeting

- Thursday, November 20 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI)
Existing Home Sales (for October)
Philadelphia Fed survey

- Friday, November 21 -
(nothing significant)

Additional Events to be aware of:

November 24: Iran nuclear deadline
November 27: U.S. market closed for Thanksgiving
December 17: FOMC meeting

Looking Ahead:

As we look ahead I don't see any changes from last week's commentary. We are in a very bullish season for stocks. While the rest of the world seems to be slowing down the U.S. is still looking good or at least better than its competition. Europe remains a major complication for the world stage but that's a slow-motion train wreck that is taking years to play out and won't be done any time soon. A recent Bloomberg Global Poll of international investors supports this outlook. Results said the world is in its worst shape in the last two years. International investors are concerned about slowing growth in Europe and emerging markets and the growing threat of deflation.

Bloomberg posted a short overview of deflation and why governments and central bankers are worried about it. You can read the article here: Deflation - The Trouble With Falling Prices.

I remain optimistic for retail sales and the holiday shopping season. We've been harping on the drop in gasoline prices as bullish for consumers. Gasoline and oil both hit new four-year lows this past week. The trend continues with gasoline futures falling to new relative lows and trading at $1.99 intraday on Friday. We might see the average price of gasoline hit $2.75 a gallon by the end of December.

There is some concern that retail sales could be very hit or miss. Many of the apparel retailers said they saw a strong back-to-school business in August and September but October was soft. Most retail analysts are expecting stronger holiday sales than last year but it will remain a promotional environment. Brick and mortar stores are tired of losing business to online rivals.

Wal-mart, the biggest retailer on the planet, has already told its managers they can price match any offer by Instead of having a big "Black Friday" promotion a lot of retailers are having a week-long Black Friday event. Meanwhile in the you can't make this stuff up category, some consumers have already started camping out in front of their favorite store to be the first in line on Black Friday.

Currently the S&P 500 is near all-time highs. This is the second longest bull market in the last 85 years. The average bull market only lasts about 165 weeks. The current bull run is 296 weeks old. Odds are it will keep going but we're very short-term overbought and due for a pullback. A simple -2% pullback in the S&P 500 would mean a dip back toward the 2,000 level. Don't be surprised when it shows up. I suspect such a move would be a new entry point for the bulls.

We have about 38 shopping days left until Christmas and only 31 trading days left in 2014.

~ James